When you take out a loan to buy a car, the interest you pay is represented as an Annual Percentage Rate (APR). However, when you lease a car, the interest is represented as a Money Factor (also called a lease factor or lease rate).
While they look completely different, they represent the exact same thing: the cost of borrowing money. Here is everything you need to know.
What is a Money Factor?
A money factor is a very small decimal number, usually looking something like 0.00125. Because it looks so small, many buyers mistakenly assume they are paying almost no interest. This is a common trap!
How to Convert Money Factor to APR
The conversion formula is incredibly simple. To find the APR, simply multiply the money factor by 2,400.
- Formula: Money Factor × 2,400 = APR Percentage
- Example: 0.00125 × 2400 = 3.0% APR
- Example 2: 0.00250 × 2400 = 6.0% APR
Why Do Dealerships Use Money Factors?
The math behind lease amortization traditionally required a money factor to simplify the calculation of the monthly finance fee. By taking the (Capitalized Cost + Residual Value) and multiplying it by the Money Factor, the lender easily determines your monthly interest charge.
However, from a consumer perspective, dealers prefer money factors because they are harder to intuitively grasp than a standard APR. A dealer might mark up a buy rate from 0.00100 to 0.00200. To the buyer, this seems like a tiny decimal change, but in reality, the interest rate just jumped from 2.4% to 4.8%!
How to Protect Yourself
Always ask the dealer for the exact money factor they are using. If they refuse to give it to you, or try to only tell you the monthly payment, use our Auto Lease Calculator to work backwards and expose the true rate.